June 01 2014

What Holds Us Back: The Business Case for Women Leaders

By Barbara Palmer

Gender diversity in leadership roles isn't just about fairness. Studies show that companies with more women managers make more money.

Clearly women benefit from changes that put more of them in leadership roles, with greater access to higher salaries, among other things. But as research has shown in the last few years, women are not the only ones with something to gain financially when they have a seat at the table in the boardroom and the C-suite. Companies with gender diversity in top management perform significantly better than companies lacking in female leaders.

In 2007, the consulting firm McKinsey & Company published a groundbreaking survey, “Women Matter,” in which they compared 45 companies with no women at all in top leadership positions with 13 companies where at least 30 percent of the top leaders were women. They found that the 13 companies with women leaders outperformed the 45 companies without them, by every yardstick they used, including profitability.

To test the strength of the link between having women in management and an improved bottom line, the study also looked at 89 companies with “significant” gender diversity and compared their financial performance against their industry average. All of them were above average.

Since then, McKinsey & Company has continued to update its research on gender diversity — its 2010 “Women Matter” report showed that gender-balanced executive committees have a 56-percent higher operating profit than non-gender-balanced committees.

In a study released in 2013, the consulting firm looked at Fortune magazine’s Fortune 1000 list of companies, and identified those that were in the top third on three metrics: the percentage of top leadership team roles held by women in 2011; the percentage of board roles held by women in 2011; and percentage of board roles held by women in 2007. (The last metric demonstrated that companies had at least a four-year history of female representation on their boards.)

There were 581 companies on the list for which data was available, and of those McKinsey identified 78 companies that rated most highly based on the three metrics. When they compared those companies to the others, they found that companies outperformed others by 64 percent when women were present on top leadership teams, and by almost 80 percent when board representation of women was above average.

The 78 companies are not “that different” from the rest of the Fortune 1000, although they skewed to more female-friendly industries and companies with more than $5 billion in revenue, David C. Chavern, executive vice president and COO of the U.S. Chamber of Commerce, and president of the chamber’s Center for Women in Business (CWB), wrote on the CWB website. “It’s important to remember that women’s advancement in business is not just a ‘women’s issue,’” Chavern wrote. “It’s an economic issue.”

An Investment Advantage?

A 2012 Credit Suisse Research Institute study, “Gender Diversity and the Impact on Corporate Performance (PDF),” concluded that the smart money invests in companies with women on their boards. The company looked at the financial performance of nearly 2,400 global companies over a period of six years to see if having women in the boardroom had an impact. They found that companies with gender-diverse boards outperformed the companies with male-only boards by 26 percent.

How Capable Are Women Leaders? It Depends on Who’s Asking …

Researchers from Florida International University and the University of North Carolina at Charlotte recently conducted a meta-analysis, published in the Journal of Applied Psychology, of 99 studies that examined perceptions of female leaders. They found that while male leaders were more likely to rate themselves as more effective than female leaders were, other people were actually more likely to rate female leaders as more effective.

When the researchers combined the effect sizes for the self-ratings and the ratings of others, the gender difference in effectiveness evened out to approximately zero.

Who Is a More Effective Leader?

In 2012, management consultants Jack Zenger and Joseph Folkman decided to weigh in on the debate over the leadership styles of men and women — and the effectiveness of each — with some hard data.

They designed a study that collected information about individual managers from their bosses, their peers, and their direct reports, evaluating them on 16 different categories of managerial competence (listed on p. 53). The categories were ones that Zenger and Folkman identified as the most important over three decades of research into leadership effectiveness.

Most of the leaders who were surveyed were men, Zenger and Folkman reported. Of the survey group, men made up 78 percent of the top managers; 67 percent of those who were senior executives reporting directly to top managers; and 60 percent of those at the next manager level.

The survey results, which Zenger and Folkman reported on Harvard Business Review’s blog, showed that not only were men not ranked more highly than women on leadership skills, but that women scored higher than men in 12 of the 16 categories.

“Most stereotypes would have us believe that female leaders excel at ‘nurturing’ competencies such as developing others and building relationships, and many might put exhibiting integrity and engaging in self-development in that category as well,” they wrote. In those four categories, women did score more highly than men. “But,” Zenger and Folkman added, “two of the traits where women outscored men to the highest degree — taking initiative and driving for results — have long been thought of as particularly male strengths.”

Men outscored women on only one of the 16 management competencies — the ability to develop a strategic perspective.

The blog post caused such a “dramatic” response that Zenger and Folkman posted a follow-up, confirming the results. They concluded: “It is high time to put our notions of gender roles in the workplace to rest.… The good news about this research isn’t that women are better than men. It’s that both men and women can develop their leadership skills and abilities, and no area need be reserved for one or the other.”